For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

All investing is subject to risk, including the possible loss of the money you invest.

It’s that time of year again. The holidays are over and Punxsutawney Phil is promising an early spring, but before that we’re still in the thick of tax season! While tax season usually conjures images of 1040s, W-2s, and sifting through piles of receipts, it’s also an important time if you contribute to an IRA or are considering doing so. Here are 5 things to think about before filing your taxes:

1. It’s not too late to make a contribution for 2015. IRA contributions can be made until April 18, 2016.[1] Nonworking spouses are also eligible to make contributions as long as one spouse has earned income for the year and the total IRA contributions of both spouses don’t exceed the income reported on the joint return. What’s more, if one spouse (or both) is not covered by an employer-sponsored retirement plan, the income limits for deductibility of traditional IRA contributions may be significantly higher than the standard limits. This can make contributing to a traditional IRA more attractive to higher-income families with only one working spouse.

Speaking of higher-income earners, if you’d like to contribute to a Roth IRA but make too much, you may have some options. You could consider making a traditional IRA contribution and later converting it to a Roth IRA (a strategy often called a “backdoor” Roth IRA). In addition, there’s no income limit for nondeductible contributions to a traditional IRA. Although you don’t get to deduct these contributions, the earnings grow tax-deferred until withdrawn.

2. Don’t forget to catch up. For 2015 and 2016, the contribution limit is $5,500 for individuals under age 50. If you’re 50 years of age or older, however, you’re allowed to make a “catch up” contribution of an additional $1,000, for a total of $6,500 per person. So, a married couple, both of whom are over age 50 and eligible to contribute, could make combined contributions of $13,000.

3. Consider making a double contribution. If you haven’t made your 2015 IRA contribution yet, consider making both your 2015 and 2016 contributions now. Although you might not think that the timing of your contribution matters, the compounded effect of late contributions can make a significant difference over time. Take the example of two investors who both contribute $5,500 a year to their IRAs. Investor A makes her contribution January 1 of every year; Investor B makes his contribution on April 1 of the following year. Just by making her contribution earlier, Investor A could potentially end up with over $15,000 more than Investor B based on the hypothetical illustration below. In a sense, this $15,000 is like “free money” for Investor A—both investors contribute the same amount, but Investor A retires with more.

Editor’s Note: This hypothetical example is provided for the purposes of illustration only. All figures are in today’s dollars. “Early bird” contributes January 1 of the tax year; “last minute” contributes April 1 of the following year. This example assumes each investor contributes $5,500 for 30 years and earns 4% annually after inflation. Projected balances are as of April of the ending year, when the procrastination investor makes the final contribution.

4. Contribute your tax refund. Continuing the theme of “free money,” if you’re receiving a tax refund, consider using part or all of it to make a 2015 IRA contribution. For most people, their tax refund check is money they haven’t budgeted for. Because it’s essentially “found money” and not needed to pay bills or living expenses, it’s a relatively painless way of funding your IRA. The IRS even makes it easy by allowing you to have some or all of your tax refund sent directly to your IRA custodian. What’s more, you don’t have to make the contribution before you file your taxes! You can file your taxes, get your refund, and then make your contribution, as long as you make the contribution by April 18!

5. Don’t park it in a money market account. Often, we see last-minute filers park their contribution in a money market account until they can go back to invest later. The problem is that many don’t go back. Take a page out of the employer-sponsor playbook and pick a balanced fund or target-date fund as a default. That way you’re fully invested and diversified from the start.

While taxes are top of mind for most investors this time of year, it’s also an important time to think about your IRA. By following these five simple steps, you can help put yourself on the right track for retirement—and maybe lower your tax bill as well.

Interested in more tips to help maximize your IRA? Check out Vanguard’s IRA Insights research series!

[1] In order to qualify, the contribution must be made (or postmarked, if mailed) no later than the tax filing deadline, without extensions. Remember to specifically designate it as a 2015 contribution—otherwise, it will be counted as a contribution in the year it is received (2016).

Special acknowledgements to Garrett Harbron for his contributions to this blog post.

Notes:

All investing is subject to risk, including the possible loss of the money you invest.

When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.

We recommend that you consult a tax or financial advisor about your individual situation.

Maria Bruno

Maria is a senior retirement strategist in Vanguard Investment Strategy Group. She leads a global team that's responsible for conducting research and providing thought leadership on the topics of retirement, wealth, portfolio construction, and financial planning for individual investors. Maria specializes in retirement planning, retirement income solutions, and wealth management strategies. Prior to her current role, Maria worked in our financial planning and advice departments. Maria earned a bachelor of science in business administration (B.S.B.A.) from Villanova University and is a Certified Financial Planner™ professional.

Comments

Lloyd W. | July 31, 2017 1:47 pm

Bill R. | October 10, 2016 6:09 pm

This my second year for RMDs to be taken from a Vanguard IRA. Our tax consultant has suggested 100% of this years [2016] RMD to be dedicated as federal withholding tax, but I see no online provision for federal withholding in the initial stages of of manual RMD? Reason for the 100% fed. tax is due to my spouse’s IRA > ROTH conversion with Vanguard funds.

How can I have 100% of my RMD be assigned to federal withholding ONLINE at Vanguard? It would be helpful if Vanguard were to provided an online pdf tutorial – so investors would be aware of what to expect during the RMD set up process and what the possibilities are ahead of time. Currently, Vanguard’s RMD site it is much like a ‘turkey shoot’ – walk thru the woods and see what happens by…

Also, does the RMD have to be ‘deposited’ in the ‘new money market’ account established this year, prior to doing anything else? For now I would like to have manual control of my RMD so I can do it once per year, in December to realize maximum earnings in the IRA before withdrawing the RMD.

Thanks for your response to my important queries!

Please re-direct if I am asking this question in an inappropriate area.

Hi Bill,
You can make this change to your account online. After logging in, simply go to the IRA and click the “Buy and sell” link. You then select “Sell Vanguard funds.” It will bring up all accounts, and you select your IRA. You’ll be prompted to select the “from” and “to” funds. When prompted for where the proceeds should go, you can select your taxable money market or have a check mailed. You’ll then be asked about withholding. You can withhold up to 100% of your distribution and have that go to the IRS. If you have any trouble, give us a call and we’ll walk you through it.

Warner L. | September 30, 2016 10:36 pm

Donald G. | February 7, 2017 7:36 pm

To Warner L. 10:36 p.m.You were asking if retirement payouts qualified as earned income. That would be a no. You must toil for the ducats(thats money) or you cannot continue to fund any retirement accounts.You can of course continue to save your retirement payouts in the taxable side of your portfolio.Most Vanguardians have “made their hay” by the time they reach their retirement times and they are just going to manage their accounts with the balances that they have saved over the long haul. Good Luck with your Retirement!RG

Lewis,
First, it’s important to clarify what type of taxes you want to avoid. There is no fund that would offer estate tax avoidance. To minimize or eliminate the estate tax, you would generally need to make a gift (a series of gifts over time and/or a lump sum) of the assets into an account in the name of the child/nephew, a trust account for his or her benefit, or a custodial account (if the beneficiary is a minor). Owning the account jointly with the child/nephew would generally cause some portion or all of that joint account to be included in your estate for tax purposes. That being said, at the federal estate tax level, you can transfer up to $5.45 million (in 2016) free of the federal estate tax. So if your net worth is less than that, there generally wouldn’t be any estate tax concerns.

If you’re trying to minimize or eliminate income tax, there are several funds to consider that could help you achieve that goal depending on your investment profile. Please feel free to contact your Vanguard representative, who should be able to provide information regarding our funds.

Another consideration for minimizing income tax would be to establish a Roth IRA for the benefit of each child/nephew. A Roth IRA account is an individual retirement account that offers tax-free growth and tax-free withdrawals in retirement. While you can’t own a Roth IRA jointly, you may be able to make contributions to the account for each child/nephew provided that he or she has earned income from a job each year. Roth IRA rules dictate that as long as the account has been held for five years, and once the owner is age 59½ or older, he or she can withdraw money without owing any federal income taxes.

Tracy J. | March 27, 2016 3:14 pm

Hey.. why get a refund at all.. my M.O. is to way under pay and pay as late as possible before fees of more than 10 percent go into effect.. Having my money in Uncle Sam’s pockets keeps me from making money on it.. I will defer payment on anything and everything whenever interest earnings are more than interest fees.. also paying for something later is generally less expensive due to inflation and you still have cash on hand to be flexible.

John J. | March 25, 2016 12:56 pm

Norman F. | March 11, 2016 1:32 pm

Wouldn’t it be nice if we could convert our RMD to a Roth. I guess there is no way for those of us to do that if we have no earned income.
I am way over the 701/2 age limit requiring the RMD, but am fortunate enough to not have to dip into it for living expenses (or even unplanned expenses or vacations for that matter). It would be nice to have some way to convert my traditional IRA to Roth. Any ideas?

Norman, thanks for your question. Earned income factors into Roth contribution eligibility rules, but not conversions. Anyone can convert a traditional IRA to a Roth IRA. That said, if you’re taking RMDs from your traditional IRA, the RMD must be satisfied in the year of conversion (in other words, you can’t covert the RMD).

We see a subset of Vanguard retirees who also may not “need” their RMDs for retirement expenses, so this question does come up.https://personal.vanguard.com/us/insights/article/ira-insights-rmd1-092014. There are tax considerations to keep in mind, and partial conversions can be an option. And you’ll want to consider conversions as part of your overall financial goals and estate plan. I encourage you to call us to get more information and to speak to one of our financial planners.

Ramesh P. | March 10, 2016 10:51 pm

Richard G. | February 28, 2016 8:23 pm

Ms Bruno I found this article kinda one-deminsional. It only applied to those people who were still working.The term having “earned income” comes to mind.You basically have to shift your focus to the saving in the taxable side of your program after you are fully retired.We do not need any of our IRA to pay any bills so we will just take the minimum at 701/2 and either save it in the taxable side or use it to rebalance our whole portfolio.Vanguard has allowed us to retire 8 years early and we are long term committed investors.We still save our 15% and use these savings both as a emergency fund for our IRA and also to ensure that we will never be forced to sell stocks due to a wonderful correction which the market goes through occasionally. Keep up the great articles. I learn a lot from fellow bloggers and writers who are more knowledegeable than I am. Good Luck to All

Carl S. | February 29, 2016 7:35 pm

You should consider beginning to withdraw a modest amount each year from your IRA and putting it into a Roth IRA, before you reach 70-1/2. Having money in that is better than having it in a taxable account (unless you incur capital losses).

Starting IRA withdrawals now is especially prudent for minimizing taxes over the course of your life if you are deferring taking Social Security benefits and thus are deferring having those (OK, 85% of those) added to your taxable income.

The basic strategy (assuming that tax brackets remain the same) should be to keep your taxable income fairly constant over the course of your life so as to avoid having a portion of it taxed in a higher bracket, and also to avoid being kicked into higher brackets for Medicare “contributions” that are quite substantial.

Of course, if all retirees follow this advice, it will eventually be necessary for taxes to be raised on somebody to cover the shortfall in revenues. There’s no free lunch for society as a whole.

Diane W. | March 11, 2016 8:39 am

There are no age restrictions for contributions to your Roth IRA, provided you have earned income. If you’re fully retired and your spouse has earned income, your spouse can contribute to his or her IRA, as well as your IRA, which would be a spousal contribution.

Keep in mind that the rules for traditional IRAs are different. Once you reach age 70 1/2 and begin taking required minimum distributions, you can no longer contribute to your traditional IRA.

Thanks for the question. – Maria

Peter D. | February 27, 2016 7:50 am

Item 3 is always presented in this way and it’s very misleading because it’s not a fair comparison. You are comparing the first investor, who has a total of $165,000 invested for 30 years and 3 months, to the second investor who has basically $159,500 invested for 29 years (since the last $5500 is invested for 1 day before the comparison period ends). You are comparing 2 different investment amounts over 2 different time periods, of course the results are different. In the comparison, the second investor only needs to wait another 12 months for their balance to match that of the first investor. They started 15 months later, so they finish 15 months later, no big surprise there.

For many people dollar cost averaging, or make a few smaller contributions throughout the year may be easier than making a single lump-sum comtribution once a year. So unless you need the money on a very specific day in the future, you should just focus on making sure you make the contribution, not on the day of the year it is made.

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For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

All investing is subject to risk, including the possible loss of the money you invest.